In United States v. Tatyana Gabinskaya, 15-776-cr, the Court (Sack, J., Lynch, J. and Murtha, D.J., sitting by designation) affirmed the judgment entered by the United States District Court for the Southern District of New York (Oetken, D.J.), against defendant-appellant Tatyana Gabinskaya for conspiracy to commit health care fraud and mail fraud. Gabinskaya, a licensed physician, was convicted of falsely holding herself out as the owner of a medical services professional corporation (“PC”) that provided medical treatment to car accident victims and submitted reimbursement claims to insurance companies. The Government alleged that she did so in order for the true owners to defraud insurance companies by claiming to comply with the requirement under New York law that PCs be owned by licensed physicians. In affirming the judgment below, the Second Circuit clarified that whether an individual is an “owner” of a medical services PC in the context of the New York no-fault insurance law is defined by the economic realities of that individual’s participation in and control over the enterprise, and the possibility of their financial loss or gain, and not merely by whether the individual is the owner on paper. This is not surprising—the law rarely accords true owner status to straw owners—and the Court found little reason to respect the corporate formalities in this context.

Background and the Decision Below

The Government charged defendant-appellant Tatyana Gabinskaya, a licensed physician, with participating in a scheme to defraud insurance companies in connection with claims submitted under New York’s No Fault Comprehensive Motor Vehicle Insurance Reparation Act, N.Y. Ins. Law § 5102 et seq. According to the Government, Gabinskaya signed the incorporation and bank account paperwork for a PC that provided care to car accident victims and submitted reimbursement requests to insurance companies, but ended her participation there. The Government alleged that Gabinskaya had no day-to-day involvement in the operations of the PC and bore no risk of loss or possibility of gain from the enterprise. Instead, the true owners were two non-physicians that operated a number of PCs and enlisted licensed physicians as nominal owners in their scheme to comply with the requirement that the PCs be owned by physicians. According to the Government, Gabinskaya received a flat fee of $1,500 per week from the true owners in exchange for holding herself out as the owner for legal purposes.

Gabinskaya did not dispute these facts at trial, but instead challenged her knowing involvement in the scheme. At trial, the Government contended that Gabinskaya knowingly participated in the scheme, citing as evidence the fact that she had lied to insurance company investigators about the extent of her day-to-day involvement in the PC. At trial the district court rejected Gabinskaya’s proposed jury instruction that “ownership” of a medical services PC is defined purely formally as whether an individual is a shareholder of the PC. Instead, the district court instructed the jury to determine ownership by considering economic realities factors, including “responsibility for the financial risk” and “domination and control.” At the end of the trial, the jury convicted Gabinskaya of conspiracy to commit health care fraud and mail fraud in violation of 18 U.S.C. §§ 1341, 1347 & 1349. The District Court sentenced her to one year and one day in prison.

Second Circuit Affirms

Gabinskaya appealed her conviction to the Second Circuit. On appeal, she first contended that the evidence was insufficient to establish her role as a knowing conspirator. Writing for the unanimous panel, Judge Lynch found that Gabinskaya’s false statements to insurance investigators regarding the extent of her involvement in the medical services PC allowed a reasonable jury to conclude that she had consciousness of guilt and knowingly participated in the scheme.

Judge Lynch then addressed Gabinskaya’s attack on the jury instruction as an improper instruction as to the definition of “ownership” under New York law in the context of the no-fault insurance system. Gabinskaya argued that ownership should have been defined purely formally. Judge Lynch rejected that argument, and held that the jury had been properly instructed to consider the economic realities of ownership. In reaching this conclusion, Judge Lynch found that courts applying New York law have squarely and consistently held that ownership means more than “merely formal ownership of stock certificates.” In particular, Judge Lynch relied on the New York Court of Appeals’ decision in State Farm Mut. Auto Ins. Co. v. Mallela, 4 N,Y.3d 313 (2005), in which the Court of Appeals held that “where ‘unlicensed defendants paid physicians to use their names on paperwork filed with the State to establish medical service corporations” “the physicians were not the true owners of the PC.” Citing to other subsequent district court and New York state court cases with the same holding, Judge Lynch concluded that the district court did not err in instructing the jury to consider the economic realities of the ownership of the PC of which Gabinskaya held herself out as an owner.

Judge Lynch then rejected Gabinskaya’s separate argument that the district court erred in excluding from evidence documents reflecting the misconduct of another attorney involved in the scheme. He concluded that the presence of an unethical lawyer employed by Gabinskaya’s co-conspirators had no bearing on whether she knowingly participated in the scheme, and that the district court was therefore within its discretion to exclude the evidence as irrelevant.

Finally, Judge Lynch rejected Gabinskaya’s appeal of the denial of her motion for a new trial on the basis of the cumulative effect of the alleged trial court errors. He found that no errors had in fact been committed.

Implications

Because the Gabinskaya panel applied settled New York law to determine the meaning of ownership in the context of a particular no-fault insurance licensing regime, the impact of the decision is likely to be narrow. The decision shows, however, that a physician who is a legal owner of a PC established under New York law will not be able to avoid criminal liability simply by virtue of having legal ownership when non-physicians actually run the business. Without active involvement in day to day operations and some economic risk that is inherent in ownership of the PC, there will be criminal liability.